Proposed Law May Lower Employer-Sponsored Health Plan Premiums

December 16, 2021 - The drug inflation rebate provision included in the Build Back Better Act could lead to a $111 billion reduction in employer-sponsored health plan premiums between 2022 and 2031, according to an Urban Institute brief.

The House of Representatives recently passed the Build Back Better Act which features a number of regulations regarding prescription drug pricing.

If the bill passes in the Senate, Medicare will be able to negotiate prices for certain high-cost prescription drugs and Medicare beneficiaries will receive a cap on their out-of-pocket spending for prescription drugs.

Additionally, the provisions would prevent the Trump administration’s drug rebate rule from going into effect, which sought to end rebates for prescription drugs under Medicare Part D.

Importantly, the Build Back Better Act includes a provision that would introduce inflation rebates on most prescription drugs purchased by employer-sponsored health plans, commercial payers, and Medicare.

The Urban Institute report looked at how these rebates would impact employer-sponsored health plan premiums, assuming that employers would direct their savings on premiums toward higher wages for employees.

The Congressional Budget Office and the Joint Committee on Taxation estimate that revenues will increase by $34 billion between 2022 and 2031 as a result of the higher taxes and wages that come from lower drug spending.

Around $2 billion of this increase can be attributed to ACA marketplace premium subsidies which will decrease as payers spend less on prescription drugs, Urban Institute researchers said.

Using the effective 29 percent marginal tax rate for employer contributions to premiums, researchers deduced the coinciding wage increase that would accompany a revenue increase of $32 billion. Between 2022 and 2031, wages are estimated to increase by $111 billion. In 2023 alone, wages are expected to increase by $3 billion.

The report assumed that the wage increases would go toward reducing premiums, therefore between 2022 and 2031, employer-sponsored health plans would see a $111 billion reduction in premiums. Based on the estimates, premiums would drop by $3 billion in 2023 and continue to decline, with 2031 seeing an estimated premium reduction of $21 billion.

Researchers compared this change with projected employer-sponsored health plan premiums from the Health Insurance Policy Simulation Model and predicted that premiums will decline by 1.0 percent in 2026 and by 1.7 percent in 2031. Compared to baseline premiums without drug inflation rebates, the premiums will decrease by an average of 1.1 percent between 2022 and 2031.

The estimated reductions are low because prescription drugs make up only about 22 percent of total employer healthcare spending. However, employers are projected to spend an average of $1 trillion on premiums every year in the next ten years, therefore the small percent reductions can still save billions of dollars, the report stated.

The Urban Institute estimations may vary if employers do not direct their savings toward employee premiums. Employers may use the savings to offer employers a larger benefits package or reduce deductible and copay amounts instead. Additionally, if the savings are paid as benefits rather than wages, they may not be taxable.

Further, the effective marginal tax rate may be different than the 29 percent researchers used for their calculations, which could lead to different wage increases.

While the Build Back Better Act could potentially lower prescription drug costs and reduce employer-sponsored health plan premiums, some payers and healthcare stakeholders expressed their concerns about certain provisions.

For example, the American Benefits Council noted that the bill does not offer negotiated drug prices for commercial payers.

However, the Council expressed appreciation toward the fact that the inflation rebates could help quell future drug price growth.